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Bank Retreat on Shipping Seen Filled by Private Equity: Freight

Bank Retreat on Shipping Seen Filled by Private Equity
The value of a new so-called VLCC, or very large crude carrier, dropped 44 percent to $90 million between 2008 and 2012, while the value of a five-year-old VLCC decreased 61 percent to $65 million in the same period, according to Norway’s DNB ASA, the world’s second-largest shipping financier. Source: Universal Shipbuilding Corporation via Bloomberg

The world’s shipping companies are turning to private equity to help fill a $249 billion funding gap left by European banks pulling out of ship financing.

About $65 billion is needed in new debt and equity this year alone to cover orders for new ships and sales and purchases of existing vessels, according to shipping fund manager Tufton Oceanic Ltd. In 2013 and 2014, the gap will be $101 billion and $83 billion respectively, managing director Andrew Hampson said in a Jan. 26 presentation in London.

Triton Partners and Oaktree Capital Group LLC, in anticipation of a future turnaround, are among private equity firms striking funding deals with shipping companies after European banks quit lending to the industry or scaled back operations. Insufficient financing may lead to a rise in insolvencies, causing higher credit losses at shipping banks already hurt by the crisis in the maritime transport industry and tighter capital rules for lenders.

“Capital will be scarce over the next couple of years, and that is a gap that needs to be bridged,” said Hans Christian Kjelsrud, head of shipping at Nordea Bank AB, the world’s No. 4 shipping lender. “Private equity funds want to position themselves for an upturn and a better market in a year or two.”

Germany’s HSH Nordbank AG and Commerzbank AG, the world’s No. 1 and No. 3 ship financiers, respectively, are cutting the size of their shipping portfolios amid the industry crisis. In the first quarter, more than half of Commerzbank’s loan-loss provisions of 212 million euros ($270 million) were booked at its ship-finance unit. Provisions probably will rise this year, according to a May 9 conference call with the bank’s management. The lender’s shares are down 52 percent in the past 12 months.

Chemical Tankers

Triton Partners, an investment firm managing more than 4 billion euros, in March acquired the chemical tanker operations of Nordic Shipholding A/S for $30 million. Triton is now combining the activities with those of Herning Shipping A/S, which it acquired in August last year, to create a fleet of 122 chemical-product tankers under the name Nordic Tankers.

Triton, which has an investment horizon of as much as 10 years, estimates that it needs five to seven years to improve Nordic Tankers, Bjoern Nilsson, a partner at Triton, said in a phone interview from London. The firm targets a return of about 25 percent, similar to other private equity firms, he said.

“The dynamics in terms of supply and demand within the smaller chemical tanker segment were attractive, as demand is seemingly improving whereas the supply of ships is more limited than in other segments,” Nilsson said. “The small tanker segment is in need of consolidation as it is very fragmented.”

Crude Oil

Oaktree on November 17 agreed to invest $175 million in General Maritime Corp., owner of 30 crude oil and petroleum product tankers, and convert its senior secured debt into equity, as part of the shipping company’s restructuring.

Still, private equity investing in shipping has been slow to take off, partly because of a lack of knowledge and because there have been attractive deals elsewhere, Nilsson said.

“In many cases private equity funds know little about shipping but a lot about the structuring of financial deals and high returns of investments,” said Peter Sand, an analyst at the Bagsvaerd, Denmark-based Baltic and International Maritime Council, which represents 65 percent of the world’s ship owners.

They are being lured by a decline in ship valuations. The value of a new so-called VLCC, or very large crude carrier, dropped 44 percent to $90 million between 2008 and 2012, while the value of a five-year-old VLCC decreased 61 percent to $65 million in the same period, according to Norway’s DNB ASA, the world’s second-largest shipping financier.

Loan Losses

The slump in asset values has caused insolvencies among ship companies and an increase in loan losses at banks, after the decline made shipping loans a larger fraction of the value of the ship used as collateral. That caused many banks to raise interest rates on loans, leaving many smaller and medium-sized shipping lines unable to service their debt.

Net shipping loan losses at Stockholm-based Nordea, the world’s No. 4 shipping lender, tripled to 135 million euros last year because of “weak market conditions” and “a general decline in vessel values,” it said on Jan. 24. Loan losses more than quadrupled to 60 million euros in the first quarter of 2012, from 14 million euros a year earlier.

Any failure to bridge the financing gap is likely to further depress ship values, according to a presentation on Greek ship finance investment boutique Eurofin SA’s website. It will also leave even “top drawer” shipping lines struggling to renew and modernize their fleets, meaning older, unsafe vessels will continue operating beyond safe operating limits, it said.

Capital Adequacy

“Capital adequacy pressures on banks may mean they cannot continue to support owners through the cycle,” Eurofin said in the presentation. “More distressed, unfunded assets will increase and prolong downward pressure on ship values.”

In a survey by KPMG of German shipping firms representing 42 percent of vessels in the country’s fleet and published on May 3, about 17 percent of respondents said private equity would have “high” relevance as a financing model in the future, while 56 percent said it would have “medium” significance.

American private equity firms have showed interest in the container shipping industry in Germany, home to the world’s largest container fleet, KPMG said in its survey. Still, the prospect of “this alternative financing for German shipping companies may prove difficult to realize given the requirement for yields of up to 15 percent,” it said.

Rock Bottom?

Investments may also fail because investors are demanding too much of a discount. While KfW IPEX-Bank GmbH, the world’s No. 7 shipping lender, has been contacted by investors who want to buy ships, they are looking to pay “rock-bottom prices,” below the market value of the ships, said Christian K. Murach, head of transportation finance at the Frankfurt-based bank.

While lenders such as KfW, Nordea and ING Groep NV have said they plan to keep the size of their shipping portfolios relatively intact, other European banks are scaling back their ship-finance operations.

Hamburg-based HSH Nordbank is cutting the size of its so-called core shipping portfolio to 15 billion euros by 2014 compared with 19 billion euros at the end of 2011 to comply with conditions set by the European Union for approval of state aid it received during the global financial crisis. Frankfurt-based Commerzbank reduced the size of its so-called shipping exposure at default by 6.6 percent to 21.2 billion euros last year.

“There definitely is a shift away from bank lending,” Rory Hussey, managing director at ING’s shipping finance division, which also plans to continue lending to the shipping industry, said in an interview. “Private equity will play far more of a part than it used to, as will the bond market.”

Triton’s most recent fund, Triton III, has 60 investors and capital of 2.4 billion euros. It plans to make more investments in shipping -- seeing potential transactions also in container, oil tanker and dry bulk markets -- as well as in consumer, industrial and business services companies, Nilsson said.

“Valuations are attractive from an historical point of view,” Nilsson said. “Our perspective is to bridge the funding gap a little.”

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